lecture file. How to build up your small firm, until you qualify for IPO.

1. Capital
“The fuel
for your
operations.”
Find Long-Term Capital, and get
access to Working Capital.

2. Summary of the talk
• Access to Working Capital allows you to
undertake high-margin projects that improve
the profits and cash flows of your company.
• Your company can only be born, if long-term
risk capital is made available. The venture
should be worth the risk.
• The funder makes a gamble, on you, the
entrepreneur.

3. 1. 2.
Actually, investors
Finance at the birth need You
and growth of a more, than you
firm. need Them.
3. 4.
Ideas for an
Find “Working
“Industry bank” or
Capital” from coops
guarantee fund.

4. How about a newly-born firm:
Positive
START cash flow
In the RED Break even
Hope for Healthy Returns, Good Payback

5. Google started 1998 2001:
with $100,000 Profits
Own funds 2010: 8 / 29
Angel Sales
Investor $25m Breakeven
100K check “ADS”
Sequoia Capital, Kleiner Perkins

6. Progress: Major player
Somebody
dares… Mergers &
acquisitions
Growth &
expansion Strategy
Start-up
the Finance
business &
Marketing Operations

7. Normal company starts humbly
Your own money.
Owner’s Equity

8. You tap other people’s money.
Current Liabilities
Liabilities
Personal Loans, Promissory Notes
Angel
investors Owner’s Equity
Cisco Systems
75 visits

9. You acquire productive assets
Current Assets Current Liabilities
Liabilities
Fixed Assets
Owner’s Equity
Machinery & Factory…HR… + Cash for
raw materials, payroll, working capital

10. This must be the hardest part
Current Assets Current Liabilities
Project Collections…
expenses
Payroll
Sales…
Working Capital

12. If something goes wrong,
Simplified
someone should FIX it.
Pay it Back.
A working-
capital Source
owned by a
group of
Justify the businessmen
Borrowing

13. Sources of funding: (Let us review)
“Easy to Access” “Difficult to Access”
Personal savings Venture capital
Your personal loans Private Equity
Your personal assets Bank loan.
Money from relatives Issue Bond.
Money from friends
How about …
A “Family Office”
A Bank for the Industry Association
PROGRESS

14. Review
Life cycle of a company
You’ve come
a long way… Strong
Hands
Aggressive
Daring
Expansion
Investment
Tremendous
Struggle to increase in VALUE
Survive
14

15. Sources of Capital
800m
Private
10m Equity
Venture
Seed 300m
Capital
Capital
They capture the
Angel 60m growth stage.
Investors

16. If you are a progressive firm,
Additional
…then, you can rounds of
attract long-term Private-
investment money. equity
funding..
Find a
Investment
Path banker finds
the capital. 16

17. After size & stability are achieved
BANKS
Investment
bankers STOCK
MARKET
… more Banks start to
lend, when the
private-equity cash flows are
money stable & sure.17

18. Your Company Reformatted Co.
Good Parts Good Parts
Investment banker
BAD Parts finds the capital. But
there may be a
“price to pay.”

19. To review:
Equity Capital: public & private.
Private Equity (usually: late-stage).
They monitor & evaluate progress.
Venture Capital (early stage):
They coach & mentor investee.
Angel Investors: Individuals in
very early-stage. (Motives.)

20. Do you have a Questionable
good project project?
Are you asking Overinflated
for a reasonable request.
amount? Numbers are
“padded.”
You can find
No deal.
funding

21. Can your CFO forecast the Revenues?
“Long-
term, loyal, REPEA
T clients” Pattern of Sales
Predict- Unknown
able

Predict- Unknown

able
Current Unknown
Year

Last year
? No Engine of Growth?

22. Can your CFO forecast the Cashflows?
IT would be nice if you had
reliable expectations, even
if there is some cyclical Forecast Company
pattern… Earnings = Net Profits
Forecast Forecast
Forecast Forecast

Current Forecast
Year
Last year  
 Engine of Growth

23. Ideal Situation Confident
Forecast
There is an
“Engine of

Reliable
Growth.” Forecast
Strong
Forecast
Current
Year
Last year
Company Earnings = Forecast Net Profits

24. IF Money is IF Money is
abundant scarce
Proposals get Proposals get
funded ignored
A simple Only safest
business plan plans can
can persuade secure funding

25. IF investors IF Investors are
are optimistic pessimistic
Proposals get Proposals get
funded ignored
Even a
Only a
“long shot”
“sure thing”
can get
can get funding
funding

26. Money flows towards GROWTH
• If you promise … unique selling
proposition.
…High Returns Sure Buyer.
at Good contract.
Low Risk,
money will become What makes it low risk:
abundant. experience, expertise.
• Even “invisible” money Track record.
will appear.

27. Money is flowing in
Gifts & Grants
Direct Investment
Remarkably,
HOT money Portfolio Investment
is NOT
moving out.
Tourism $

28. The Philippines
Economy
New Business
Is money
BOND market
flowing to
New
Stock market
Business
Ventures?

29. Review the process Expansion
Working capital
Start-up capital
Money is
flowing to
New Except to
Business Mine !
Ventures

30. One FILIPINO start-up got
seed capital from here:
• Springs Seed Capital Initiative in Singapore,
committed Sing $10 million to 15 companies. Total
sum invested so far: $63 million.
• an investment fund that “matches,” the
sum invested by a third party in an
approved start-up.
• 185 start-ups have benefited from the fund: 30 of
them have earned more than $1 million revenue in
2009-2011.
Search in Singapore

31. The usual “seed
Investors capital” initiative
Decides to fund
the start-up “Concept” Invests the same
amount
The Small Business
US$1 m US$1 m

32. “Springs Seeds”
• Start-up Enterprise Development Scheme
(SPRING SEEDS) – Two dollars to every dollar
to be matched against investments of third-
party investor(s). So far, $63 million invested.
• The third-party investment ranges from ….
S$75,000 TO S$1million.
ADB seed capital funds  US$480 million
For “Asia”

33. Better than the usual “Concept”
SPRINGS “seed
Investors capital” initiative
Decides to fund Invests DOUBLE the amount
the start-up provided by investors
The Small Business
US$2 m
US$1 m

34. Let’s set up one, like this:
Technology
Biz plan
Enterprise
Contest Commercialization
Board of Judges Invests funds in a complete
START-UP
Form a company
Funds
Winning Plan

35. Focus on Technology
• Technology Enterprise Commercialisation
Scheme (TECS) – a competitive grant to
convert breakthrough technology ideas and
proprietary IP into a promising business.
• competitive grant
• proposals are evaluated on technical and
commercial merits by a team of reviewers.
This is a task for a “noble statesman.”

36. Idea for an “Proof of
Invention CONCEPT” FUND
Board of Judges Invests funds
The Invention, itself
S$250K
Prototype

37. Invention “Proof of VALUE”
Who wants to buy it? FUND
Invests funds to help you find
Marketing Whiz
a buyer for one million widgets
The Invention finds a
BUYER
S$500K
Purchase
order

38. YES! Start-ups …. MAX S$50,000
Owner’s Young Entrepreneurs
money FUND, aged 18 - 26
TIMES FOUR, of what money you can
Plus FRIENDS’
raise from friends, relatives…
money
Bright kid with an idea
Amount
What he
can raise
x4

39. From Customer
Down payment
Working
on a purchase
capital order
BANK
Bank Loan
against purchase
order.

40. Short-term
Credit Lines from a Bank
Borrow, over the  BANK lends…
course of the year …
…even if no
collateral.
Track Record:
Repayments. Just the BACKING
of PARENT
Many years. COMPANY
FINANCE is not usually the concern of
supervisors, unless …Head of a Subsidiary.

41. Credit from Parent Company
Borrow, over the  Parent lends…
course of the year …
…but at 15%
Track Record is
obvious, to Owner. To motivate you to
Owner supports his pay on time, or
Vision/Mission. pay ahead of time
What is an Acquaintance: Someone you know ..well enough,
to borrow from. BUT not well enough, to lend to.

42. Special Case: What if you need more
than just CAPITAL
• TO Control costs, or
• You may need raise revenues
specialty managers… • TO ensure and/or
• You may need stabilize the forecast
synergies… cash flows.

43. If your capital provider… can start up
your “Engine
Sales of Growth.”
Raw materials
Cost of Capital
Cost of Labor
Cost of Land
- Costs
Taxes
= Healthy Profits, Cash Flows

44. Different sort of Problem
Need: Managers & Capital
Growth will
require additional Ready for
capital & human Next Step ?
resources
Capital is being
offered, together
with management
experience &
assured sales.

45. Why is that: Prospects are FLAT
A lot has been
achieved, so …Need a strategy
far. BUT: for Growth…
Prospects…

46. Seek beneficial DEAL
This is
YOUR
potential.
Don’t let
it, go to
You need
waste… CAPITAL &
STRATEGY
to get it.
Find a
BRIDGE

47. DEAL partners
FINANCIAL
PARTNERS
Or
STRATEGIC
PARTNERS

48. Working Capital
LOANS Capital
FINANCIAL
He receives 20% SAME
PARTNER:
or 40% of manage-
infuses SMALL
company shares. ment team
capital
STRATEGIC
PARTNER: He receives 60% TEAM of
Infuses BIG or 80% of outside
capital + know- company shares. managers
how

49. Review of this section:
Engine of Growth
is running
FIRST PROFITS:
PRIVATE EQUITY
NEW VENTURE:
steady sales
IDEA INVENTION:
first buyer

50. Review of this section:
Expansion,
diversification
QUALIFY FOR
STOCK MARKET
QUALIFY FOR
BANK LOANS
Engine of Growth is
running, already…

51. In the next section:
• We will learn that • Find out what investors
“Investors need you are looking for, so that
more than you need you be on the same
them.” “wavelength”
• What are the
• If you can promise a techniques for
reward and manage minimizing business
the risk, money will risk?  Pool the funds.
“run” to you. Invest in many.

52. What do investors look for?
Growth …at
acceptable levels
of Risk
Small Savers  Wholesale Savings
Loans or Equity Investment Funds 
Subcontracted to Banks, Funds, etc

53. Subcontract
Institutional to:
Investors
Individual
Specialist
Investors
Funds
Managed
Funds Private-Equity
Small
Funds
Savers
“Retail “Wholesale Venture Capital
dealers” Funds
customers”

54. Target: 20%
FUND Manager
Stocks
Expert
1. Stocks
2. Bonds
3. Cash Bonds
4. Etc Expert
“Managed Funds”
Beat INFLATION. Meet Cash Expert
growing RETIREMENT
PAYMENTS.

55. Target: 20%
FUND Manager
Stocks: 18%
18% x 0.5
6% x 0.4
2% x 0.1
--------------- Bonds: 6%
12% for the
total
Cash: 2%
*Not good enough

56. Target: 20%
FUND Manager
Special
Funds: 39%
39% x 0.2
18% x 0.7
6% x 0.1
--------------- Stocks: 18%
21% for the
total
“Venture Capital TRUST” or Bonds: 6%
Hedge Funds or “Absolute
Alpha” funds: various names

57. Somebody should search
• For fast-growing companies
• Put them all together
• And then, they will be able
to attract funders.

58. Thoughts
Small companies grow fast
Average 39% / year,
For example
120%
60%
40%
20%
There has to be an
acceptable level of RISK;
- 30%
RISK, that is managed.

59. Thoughts
Like the fingers of one hand
Average 39% / year, From Very Good,
For example To Good, To Bad.
That’s Life
120%
60%
40%
20%
Careful monitoring and
- 30% coaching to manage the Risk

60. High Returns
Range of
120% investment
outcomes
- 30%
Net Losses

61. The Big Enemy: inflation
90% High Returns
+ +
50% + Risky new ventures
+ Stocks
Bonds
5% Cash
+
0%
Low - High Risk
-50%
Risk
- Business
-
Failures
Losing ventures:
Net Losses
-
still have hope?

62. To achieve more
of the POSITIVE
returns, we
need:
Risky new ventures
Stocks
Bonds 4%
2%
Risk management
Guarantee Fund
Back-up…
Contingency Plan

63. IF CONSERVATIVE:
90% High Returns Aggressive
Conservative
+ +
50%
+ Stocks
+ Risky new ventures
Bonds
Cash
0%
Low Risk High Risk
-50%
- -
Business
Failures
Losing ventures:
Net Losses
-
still have hope?

64. IF aggressive:
90% High Returns Aggressive
Conservative
+ +
50%
+ Stocks
+ Risky new ventures
Bonds
Cash
0%
Low Risk High Risk
-50%
- -
Business
Failures
Losing ventures:
Net Losses
-
still have hope?

65. 90% Venture capital’s
interest
50% Risky new
ventures
Sunrise
Industry
0%
High Risk
Losing ventures:
still have hope?
-50%

66. To attract venture capital
• Companies can band together, establish
a credit cooperative, or working capital
fund.
• They take turns borrowing from the
credit cooperative.
• IF the fund grows 39% a year, big
funders will want to join in. s

67. “Industry Association”
50
20 people
contribute Lend at 30%
2million
5million each WORKING
CAPITAL FUND
To Projects that
RETURN > 30%
A BOARD checks
Hire a BUSINESS PLANS
FORMER Promises 25%
BANKER, who per year IF NO COLLATERAL:
knows how to Interest HIGHER THAN 30%
process Loan
Decisions.
Defaults carry penalty. Payable next year.

68. “Industry Association”
Outside
Investors make
placements. Lend at 30%
(After 3 years WORKING
track record) CAPITAL FUND
To Projects that
RETURN > 30%
The BOARD selects
A GODFATHER Target 25% who is deserving
Fund supplies returns per
ANY deficit. They Coach & Mentor
year on capital the fund recipients, to
MAKES invested
EMERGENCY assure success.
LOANS
“default insurance”

69. “Buddy Guard”
Co-guarantor :
someone who
“vouches” for his
Buddy. Lend at 30%
Style of Grameen
WORKING
Bank: each borrower
CAPITAL FUND
has 5 Buddies, for Fails to pay interest
back-up. or principal?
A buddy pays in his
behalf?
A CO-MAKER takes on
the burden, in case the
borrower fails to pay.
Failed to pay 30% this year… Therefore pay 66% by next year.

70. Just like PREFERRED
SHARES have cash
dividends, payable Lend at 30%
in arrears. WORKING
(LATE PAYMENTS CAPITAL FUND
ACCEPTED.) Fails to pay interest
or principal?
If the rest of the FUND is
doing OK, then the board The Fund grants an
can COLLECT NEXT YEAR. extension?
Failed to pay 30% this year... Therefore pay 66% by next year.

71. Development. Progress. Growth.
Working
Capital.
+ +
Project Loans.
Sunrise +
Industry
Approved on
the basis of = =
BUSINESS
PLAN.
- -

72. OPTION 1: “pooled funds” tend to minimize overall risk
High-Margin Projects
BACK-UP that need much Working Capital
system
Emergency
+ + +
Working
lender
(ANGEL) just
Capital
Sunrise
Industry =
in case FUND
- -

73. OPTION 2 with insurance premiums paid: even better!
High-Margin Projects
Credit Default that need much Working Capital
insurance
Small + + +
Working
Business
Corp’s Back-
Capital
Sunrise
Industry =
up Fund
FUND
- -

74. Example of OPTION 1
They grew, and became
VIPs to vouch
for the
self-financing.
project
Insurance
Mega Projects
Contin- + + +
Infra-
gency
Guarantee
structure
Sunrise
Industry =
Funds
Funds
- -

75. Example of OPTION 1 Smaller than the
GOVT WorkCap requirement
vouches for of operating companies
the project
Loan Guaranty
They get paid back
Contin- + + +
gency
Obligation
Student
Loans
Sunrise
Industry =
(stand-by)
- -

76. Example of OPTION 1 Smaller than the
WorkCap requirement
Someone
of operating companies
vouches for
the whole.
Most get paid back
Back-up plans
+ + +
Securitized Credit Card
mini-Loan Receiv-
Sunrise
Industry =
packages ables
- -

77. Business Loans
ANYBODY can
Personal Loans contribute capital:
INDIVIDUALS or
companies
WORKING
CAPITAL Pays cash dividends
“FUND” Lends to any
QUALIFIED company.
Projects > 30% IRR
Nearly always should pay cash dividends

78. Business Loans
Personal Loans
Companies make
contributions, for
membership
CREDIT
COOPER-
ATIVE Lends only to
member companies
> Co-Makers…
> Jointly & Several
Sometimes pays cash dividends; usually: REINVEST

79. 33 incorporators in 1969.
Raised P1,201.94
Reached P1bn by 2011.
Loanable funds.
System of
microlending Grew to P220m by 1980s.
Return on Equity 40% per year
Perpetual
Working + + +
Help
Credit
Capital
P1201 in
Livelihood
projects =
Coop, in
Leyte
1960
- -

80. In 2008, Most Outstanding Cooperative in the Philippines
431m by 2011.
System of
microlending
Assets 1m in 1988, 1.6m in 1998
Barangka Working + + +
Credit
Coop, in
Capital
P5300 in
Livelihood
projects =
Marikina 1972
- -

81. “Nice project” REPEATS
100 million every year
15 million
3 million
2 million “Weak”

82. “Bad project”
5 million
costs 2 million
revenues

83. Good contracts = lead to steady sales
“TOP LINE”
Sales
-Costs, taxes
“BOTTOM LINE” = Net Profit
Make the sales grow fast.
Then you attract capital.

84. 80% of TOTAL THE LARGEST
INDUSTRY
REVENUES
FIRMS
Hoping
for
THE SMALL growth
20% of TOTAL FIRMS
INDUSTRY
REVENUES
Small Size LARGE SIZE

85. Small Business Investment Company are
privately-owned, privately-managed
investment funds, licensed and regulated by
SBA, that use their own capital to LEND to
Small Firms.

86. Small Business Investment Company is backed by an SBA guarantee
to make equity and debt investments into small businesses. They
supply equity capital, long-term loans, and management assistance.

87. Investors USA: Small Business
Investment Corp.
Debt or EQUITY Since 1994
The Small
Business US$20m
(Matching
US$10m funds)

88. Equivalent to your “WORKING CAPITAL FUND”
Small Business Investment Corp.
Investment Committee
Equity
Loans to one
company
Max 7 yrs investments in
another

89. Small Business Investment Corp.
Equivalent to your industry’s “WORKING CAPITAL FUND”

90. Small Business Investment Corp.

91. The Philippines
The Small
Business Matching
FUNDS from
a
Investor bank, guara
MONEY nteed by
SBC.

92. The Individual Guarantee (per company)
BANK Guarantor
LOAN
Guarantee
Certificate
Borrower

93. The PORTFOLIO Guarantee (per bank)
Whoever passes
the loan
BANK Portfolio criteria, can
Guarantee borrow from
Contract bank.
LOAN
Guarantor
Borrower * can INSURE 80% of the loan.

94. The PORTFOLIO Guarantee (per industry)
Whoever passes
PSIA Portfolio
the loan criteria
of the PSIA
FUND Guarantee FUND, can
Contract borrow.
Working LOAN for
Capital some big
LOAN project Guarantor
Borrower Small Business Corp. CAN INSURE up to
80% of the loan. The insured lender
recovers cash today, while still trying to
collect from the delinquent borrower.

95. COACHING & MENTORING
Will the project produce 70m in sales?
Is the market ready for this product?
Are the industry trends in Favor?
May I see the design of marketing plan?
P 70m sales
MONITORING & EVALUATION
Can you really manage the project that well
P 10 million How are you implementing Marketing Plan?
How are you supervising Production Team?
project cost How are your Project Management skills
Do you need coaching on strategy
Are you able to target high-margin projects?

96. If default rate is 3% only: Only 1
becomes a
LENDS 100m problem
Working THE REST: HEALTHY
Capital
Fund:
100m
ONE COMPANY:
Loan Default 3m
The problem company promises to pay up by the second year.
Meanwhile, the fund can lend up to 700m worth!
Less than 1 / 7 ever default.